October 25, 2019 / 8:05 AM / 21 days ago

Euro zone yields rise as traders hope for Brexit resolution

* Yields edge 1-2 bps higher in early trade

* Brexit, economic uncertainty hovers over markets

* S&P ratings review scheduled for Italy & Greece

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Tommy Wilkes

LONDON, Oct 25 (Reuters) - Euro zone yields rose on Friday as investors hoped for political uncertainty in Britain would end with a Brexit deal being approved and waited for next week’s Federal Reserve meeting in the United States.

Outgoing European Central Bank President Mario Draghi’s final policy meeting on Thursday was free of major surprises, although many analysts said it erred on the side of dovishness as he talked up his ultra-loose monetary policy.

Euro zone bond markets have largely shrugged off British Prime Minister Boris Johnson’s call for a December election, said Cyril Regnat, a fixed-income strategist at Natixis in Paris, because it raised hopes of another vote in the UK parliament on the Brexit deal.

Investors are now waiting for the European Union’s response to a British request for a delay to Brexit beyond the Oct. 31 deadline.

“In the end, British MPs will have to think whether it’s in their interest to vote for this deal,” Regnat said. “As long as we don’t have any official agreement between the EU and UK, even if it’s probably a very small risk, there is still a risk we end up with a no-deal.”

The 10-year German government yield was up 1 basis point at -0.395%. French and Austrian bonds were up by a similar amount.

Business surveys on Thursday reaffirmed that the euro zone economy is struggling, although economists say there was some evidence the situation is at least not worsening.

“We may have reached the bottom in the euro zone, but there is still uncertainty that is troublesome in the U.S. Many accounts will be waiting for the Fed,” Regnat said.

Analysts at Unicredit noted that S&P is scheduled to publish its ratings review of Italy and Greece. They expect S&P to upgrade the Greek rating by one notch but to leave Italy’s unchanged at BBB with a negative outlook.

“In the short term, Italy’s economic outlook remains highly uncertain, and activity is likely to stagnate this year and to recover modestly in 2020,” the Unicredit analysts said. Trade tensions between the U.S. and Europe had “increased downside risk,” they said.

Italian yields rose 1 to 2 bps on Friday, with the 10-year yield at 1.019%.

U.S. Treasury yields were little changed . (Reporting by Tommy Reggiori Wilkes, editing by Larry King)

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